Wednesday, November 05, 2003

Improving Government Performance
How about managing government for results?

Step one in turning around California. Changing the TAO of government

Author: Alistair Davidson
Draft 4
Dated October 22, 2003

Bio: Alistair Davidson is a performance improvement consultant who has been CEO of five companies, done turnarounds and also worked briefly in Canadian politics. He heads a California based boutique consulting firm, Eclicktick Corporation ( His blog is

In the world of business, there have over the past 35 years been a conflict between the “financial types” (FTs) and the “capabilities people” (CPs). The same conflict seems to be crippling all levels of American government today. California evidences just such a conflict between the short term budget cutters and a longer term view of the state's needs. New Zealand's reforms in the 1980s may provide a useful roadmap for the way out for California.

The FTs believe that maximizing shareholder value is the “be all and end all” in running companies. In government, this view is typically shared by those who wish to downsize government and cut back government spending. For these “financial types”, most government spending is bad and less government means a fairer society and higher economic growth.

In contrast, CPs believe that financial results such as shareholder value may not reflect the true value of a company. They cite the irrational exuberance of the dotcom boom and the overpayment of executives whose remuneration skyrocketed during the recent boom.

In government, CPs tends to more concerned about the outcomes of changing spending levels. Does healthcare performance improve if we spend more money? Do children do better in smaller classes? What kind of pollution regime produces lower levels of pollution? Has social equity changed from a tax reduction? Does giving illegal immigrants produce more or less carnage on the roads?

The problem with these two contrasting views of the world is that to some extent they are ideological, though not necessarily a straight mapping with left wing and right wing. Nonetheless there is often more agreement on goals (e.g. higher income, better economic growth, better healthcare outcomes, lower carnage on the roads) than there is on methods (e.g. vouchers permitting choice vs. state funded schools).

Reframing Political Debate
The recent recall of Governor Grey Davis in California represents dissatisfaction with the state of California (pun intended). California is about as difficult a place to govern as one could imagine:

- 70% of spending has been pre-specified by voter initiatives
- the tax base is structurally unsound-
budgets have to be passed by a two-thirds majority of the legislature, which requires getting political opponents to agree

All in all, it's no surprise that California, has, as a result, found it difficult to balance its budget. When the cyclical economy downturn, plus a regional economic downturn combined with an energy crisis and the transfer of fiscal pain to the states by the Federal government all hit at the same time, the inflexibility of California spending restrictions revealed the weakness of its governance approach for all to see.

As a result, the current debate about improving California government is unlikely to succeed without a reframing of the political process. Merely cutting spending is likely to be contentious with a Republic governor and a Democratic majority in the California legislature. Instead, something not discussed in the recent recall, political innovation is required.

The Way Out
So what's the way out of the box? In testing an early version of this article on a group of leading business strategists, the Board of Contributing Editors of Strategy and Leadership magazine, the feedback was quite varied. There was little consensus. Some lent to the FT school: Cut spending. Restrict spending growth. Others more CP in view said: The problem is very complicated. There are no clear and easy answers.

But in this lack of consensus lies the answer. No one knows. And there are three reasons why we don't know. And even if we think we know, we don't agree. For short let's call this the TAO of government - Technocracy, Accounting and Outcomes. In other words, let's recognize government is complicated, measure using unbiased third parties and refocus the political debate on accurately reported outcomes.

Technocracy is the T in TAO.

The first problem is that government is complicated. Determining what combination of programs and spending produces results is very complicated. And often it takes time and expertise to figure out. You have to be technocrat or specialist to understand the issues and policy choices.

International comparisons are often useful, but few voters have the interest to master such knowledge and debates.

The net result is that modern government is often about understanding what strategists call feedback loops or systems. What are the consequences of a program both short term and long term?

Both left and right wing talk about these issues. Milton Friedman, for example, has argued that rent control reduces the availability of low cost housing for the poor by reducing the incentive to build new housing. More liberal social activists focus on the impact of rising rents on reducing housing availability. In reality, low cost housing is much more complicated question affected by issues such as transportation access, tax deductions for mortgages, and the political voice of the middle class vs. the absence of political voice of the poor.

Both left and right wing presumably believe that low cost housing available to house the poor is a good idea, but they have not come to agreement on the system effects of policies. Political debate around the issue is often sterile, confusing and so simplistic that is become the political equivalent of “branding” -- a new and improved soap powder - new, but the value of the improvement (and debate) perhaps marginal.

The net result is that superficial debate about improving outcomes often does not contribute to informed political debate. Improvement in performance requires improvement in the interaction between programs and policies - a complex issue to talk and debate, let alone vote on.

And if the creativity and motivation of those in government is to be harnessed, then three issues have to be addressed. First, the lazy and the incompetent need to be fired, typically a difficult if not impossible problem in government. Second, more flexibility needs to be allowed in government. And, third, success of individuals needs to be measured over a time frame that allows for success to occur.

Accounting and Measurement
A second key element, the A in TAO, is the unfashionable, and, dare I say, dull topic of accounting and performance measurement. Without good accounting, government performance is not really debatable in any meaningful way.

The problem here is straightforward: politicians almost always lie about the numbers. There is really no debate about misrepresentation here. Yes, there are fluctuations in forecasts, but fundamentally politicians, “spin”, lie and misrepresent their numbers, their spending, their revenues and the expected results.

Now the assumption in a democracy is that you can “throw the bastards out” if they lie, but in a complicated world, people forget or get confused unless the lie is large. And if the lie is large, modern media can often be used for distraction in the short term.

Any decent reforming politician needs to be evaluated heavily on one important decision: that is, committing to transfer the accounting, forecasting and reporting of government expenditures, revenues and outcomes from the political process to neutral and politically independent third party.

What this would mean is that just like a public corporation, there should be standards controlled by neutral third party institutions for evaluating government spending and outcomes of policies. Governments should not be permitted to reclassify their expenditures for exactly the same reasons that most American are upset about the corporate malfeasance of Enron, MCI, Tyco,… the list keeps going on.

The quality of government accounting is so low in the US that if governments were private sector companies, government chief executives would go to jail. Balance sheets for government are rarely produced except in rare countries such as New Zealand. A simple distinction between the operating expenditures of government (what it takes to deliver services today) vs. the cost of investing in infrastructure like roads, bridges, etc. is almost never presented accurately. Contingent and future liabilities such as guarantees or leases are also misrepresented on a regular basis.

In the same way we have a court system for keeping government and legislators honest, we need the equivalent accounting role institutionalized. If the numbers are not presented correctly and, as a very minimum consistently, how can we have an informed democracy?

The final part of the TAO is O for Outcomes - the results produced. In business, the state of the art in measurement and performance improvement requires reporting and measuring a basket of outcomes or a “balanced scorecard”.

In business and government, there are typically four types of outcomes:

Financial outcomes e.g. increase in shareholder value; (in government, the equivalent analysis is typically about deficits and share of the economy).
Customer and market outcomes, e.g. market share, repeat purchase rate, customer satisfaction; (in government, measures might include economic growth, bankruptcies, job creation, crime rates, education quality)
Process outcomes, e.g. mistakes made, quality levels, throughput, capacity utilization; ( in government, cost of delivering services, quality of services, range of government services)
People outcomes, e.g. skill levels, productivity, number of skills trained for (in government, outcomes might include employment levels, income per family, infant mortality, life expectancy, literacy, educational scores, percentage educated to different levels, infection rates).

Few would disagree that performance outcomes should be the focus of government and political debate. Some economists in the past few decades have invented short-form performance measures such as the “misery index” or the sum of the inflation rate plus the unemployment rate. But in reality, government is too complex for one simple measure like the misery index or for only one basket of performance measures.

Many recent governments have started to use scorecards for comparing school performance. Scorecards need to exist for programs, government departments and governments in general.

But let's be frank, scorecards are complicated. They vary by area of government. They are different in different states. The people who are going to seek to improve scorecards should be those being held accountable for performance improvement. Voting should be refocused on outcomes not spending. This places the TAO of government directly against the voter approved proposition approach in California. Voters should seek to approve baskets of outcomes not spending patterns.

Just as importantly, some programs should not be evaluated on a short term basis. A key issue in performance improvement is determining the period of evaluation. You don't evaluate a bridge with a forty year life on a four year political term. However, the consequences of delayed maintenance seem to be important to report, as lowered maintenance often trigger much more expensive later costs.

What this means is that an improved voter proposition process should (1) be voted on as a collection of outcomes not based upon one spending restriction, and (2) different parts of government should have terms that are consistent with the planning life of their spending.
Decisions about infrastructure and current expenditures need to be accounted for separately, but it's not clear that voting on the two should be separated. Single issue propositions should be discouraged as they tend to prevent consideration of their consequences and outcomes. And in the case of an area like road maintenance, postponement of routine maintenance can have disastrous long term consequences where future reconstruction costs rise much faster than the short term savings.

Taking a Page from New Zealand's Playbook
In the 1980s, New Zealand ran out of money as a government. It was effectively bankrupt. The US is currently fiscally unbalanced and some would say headed in a similar direction. Certainly, California's budget $38B deficit verged on bringing the state to bankruptcy.

But whether you believe the US will incur huge difficulties in the future as a result of tax cuts, Social Security spending obligations increasing due to demographics, the breakdown of the US medical system or not, presumably we all, as voters, agree that more effectiveness in government spending, more transparency in accounting for spending and outcomes is a good thing.

New Zealand did what many over-burdened governments have been forced to do. It sold off state enterprises, which became more efficient as a result. Most right wingers would have no objection to such sales.

But New Zealander went one stage further. They changed the way that government ministries were run. The eliminated the constraints upon government ministries and demanded that ministries table in Parliament the outcomes that they proposed to achieve and their total level of spending over a multi-year period. Specifying outcomes is likely something that both left and right wing might be able to agree on.

New Zealand is, therefore, pretty much the opposite of California. In California, voters constrain the spending patterns of government. The political process is superficial and overwhelming. There is little connection to outcomes in the way that government spending is managed.

The net result is that the while the propositions approved by Californians express the frustration of Californians, they are difficult to untangle if they don't work out. Getting rid of legislation or restrictions like Proposition 13 that limited the tax base is always harder than passing new legislation. The net effect of many individually good propositions has now so constrained California government that it is inefficient. And we can all agree that outcomes are what we seek, not spending patterns.

International Benchmarking: Lessons from the Ford Taurus
When the first Ford Taurus was introduced in the 1980s, it was instrumental in the turnaround of Ford. A key element in the development of the Ford was competitive benchmarking. Ford bought, analyzed and tore apart over 20 leading competitive products. And research on innovation suggests that basing new products on global and success patterns often leads to superior performance.

In the same way, American government programs and spending need to be severely benchmarked against international alternatives and such comparisons allowed to frame political debate and delivery strategies for government programs. Surprisingly, I find this an unpopular idea for many Americans. Many, particularly the well-off, have concluded that America is the best country in the world and, therefore, has nothing to learn from other countries. Every time, I hear this reaction, I think one word “hubris”.

In contrast, a more humble Japan transformed itself from a poor agrarian nation into one of the most powerful industrial countries in the world over the past century by consciously studying and selectively imitating the best aspects its more modern competitors. And while Japan has stumbled in recent years, it is stumbling for reasons of entrenched interest and power, something the US shares today.

Let me argue that America, while an immensely successful country in many ways, could also benefit from comparing its approaches to other countries governmental programs. Normally, political debate tends to end up with code phrases such “Canadian socialized medicine” rather than more informed analysis of expenditures, programs and outcomes. How are Canada and Germany able to spend less and produce better healthcare outcomes? How do other countries encourage higher savings rates?

Having outcomes in the US compared to outcomes in other countries - something that certainly happens informally but mainly among the technocracy - should influence mass political debate more constructively.

Changing the TAO of American politics does no more than formalizing trends that already exist informally in American society and government. The US has been a bold political experiment since its founding in 1776. It has frequently demonstrated the value of managerial innovation in its economic history.

The US has benefited from immigration since its founding, in creating the unique culture of the American melting pot. Imitating the best ideas in the world is something that entrepreneurs do all the time. We can do the same with government programs. Experimentation in improving government management follows in a long tradition of American innovation.

There are many ways of going wrong with any new approach to government, but without reframing government to focus upon outcomes and permit flexibility to those operating government, little in the way of improvement can be expected.

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